#58: Ask Paula – Death, Taxes, Crushing Debt and Moving in with Mom

It’s the first Monday of the month (and the year!), and I’m kicking off 2017 with answers to your questions.

Our first question comes from Ashley. She’s a single mom setting aside $150-$200 per month in a savings account for her two-year-old son.

She realizes this money could grow faster elsewhere … but where should she invest it? College 529 plans are too restrictive, Ashley says, and she’s reluctant to open a brokerage account in his name. What other alternatives are there?

Ashley asks a second question, as well. She’s determined to crush her mortgage ($62,000) and obliterate her student loans ($52,000). And she has an extreme idea: moving in with mom.

Ashley could move in with her mother, rent out her home, and collect a nice spread. She’d use this additional income to pay down her debts. Is this a smart idea?

Our next two questions come from Vanessa.

Vanessa is tackling her student loan and credit card debts. She’s wondering if she should close out her credit cards due to their horrible interest rates. But she’s had these credit cards since college — won’t closing these affect her credit score?

Cut ’em up? Keep ’em? What should Vanessa do?

Vanessa’s next question is about her (eventual) demise.

Vanessa’s nieces and nephews are her beneficiaries. What might happen if they inherit her IRA? What are the tax consequences? What red flags should they stay alert for?
Julie asks the next question:

She and her husband are 20-25 years away from retirement. They save money and invest the balance quarterly. These new contributions are meant to rebalance their portfolio.

This quarter, Julie notices that European equities are much cheaper than US equities (due to the recent turmoil). She wants to scoop up a bunch of European equities while they’re cheap. Should she?

Is this smart value investing? Or is this another ill-fated attempt to time the market?

Nicholas asks the next question. He and his wife make too much to contribute to a Roth IRA. Should they make a backdoor Roth conversion?

Melissa from Colorado asks the final question in today’s episode. She’d like to replace her salary with investment income ASAP. But how?

Should she invest in her 403(b) account? Prioritize her Roth IRA? Crush the mortgages on her two rental properties? Save for a downpayment on a third rental property? How can she fast-track her financial independence?

P.S. On the first Monday of the month, I answer your questions about money, entrepreneurship, investing, and anything else you throw my way. Got a question? Leave a voicemail here.

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6 Comments

Great answers Paula! If I could offer one correction, though: for the gift tax, the $14,000 is the amount before the gift giver might have to pay taxes on the amount given, not the recipient. So in Ashley’s case, if she were to give her son more than $14,000 in one year, she would be the one worried about taxes on the amount over $14k, not her son. (TurboTax has some good info on the Gift Tax on their site: https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax/INF12036.html)

For Vanessa’s question about the credit cards, she asked if she could call the credit card company and get them to do something to fix the cards she doesn’t like, and the answer is “yes!” If she’s planning to carry a balance again, she could ask them to reduce the interest rate, of course, but there are better things she can ask them for if she’s not planning to carry a balance anymore after the debts are paid off: a product conversion to a credit card that has rewards or better rewards!

Also, if she’s paying an annual fee on any card, she can call and ask them to either drop the annual fee (she’s had the cards for 20 years, after all – she’s a great long-term customer and they shouldn’t be charging her any annual fees!), or again, to do a product conversion to a card with no annual fee. No matter which of these she asks for (or even if she asks for all of them!), these options would allow her to keep the cards’ long credit histories, and the good debt-to-credit ratio, which will keep her credit score in tip-top shape.

Finally, if she does decide to go the route of cutting up the cards, I have a suggestion: sometimes, credit card issuers will close a card if it hasn’t been used in a long time. Since she’d want to avoid that, there’s a simple solution: put one small recurring expense on the card before you cut it up. I like to use a Consumer Reports online subscription for this purpose: it costs less than $40/year (and probably saves me much more than that with the product ratings info) but it puts one charge per year on my inactive card, so that the credit card company doesn’t close the card on me. Any small, recurring charge would work, though! Just make sure to either make a calendar reminder to pay off that credit card balance each time, or set your bank to autopay that credit card whenever there’s a balance (and to email you about it!).

Oh, and Paula, I really love your coffee mug/coffee metaphor for an IRA and index funds. That’s a great way to explain it!

I contemplated whether or not to mention the “put a small recurring charge, like your Netflix subscription” recommendation in the answer.

One thing I’m trying to figure out, as I answer these questions, is how to give a response that’s detailed but not overly so … i.e., how much time to I dedicate to an answer // what should I cut out, and what should I include? How many questions should I answer in an episode and how long should the episode be?

I still don’t know the right answers to these questions, but that’s what I’m playing // tinkering with as I record the Ask Paula episodes. These can be deep + detailed or surface-level, or somewhere in-between …. I need to keep experimenting until I find that sweet spot. 🙂

Hey Paula! I think you’re doing a great job with the length of answers. You are completely right that it’s about finding that sweet spot – not too long, but also not too shallow of an answer, either. And I think you’re homing right in on that.

Of course, the beauty of comments is that we can get waaaaaay into the weeds of something, and people can choose to spend extra time reading the comments, or not. Bonus content, in a way. 🙂

Julie

I was so focused on being brief when I left my message that I forgot to thank you for answering my question and for the amazing job you do on this show. Thanks!

That range for the European equities I gave in my question was indeed hypothetical, but it brought up an interesting thought that I often have. I’m in Canada, and like many non-Americans, having the majority of our portfolio in investments outside our home country and home currency is actually considered less risky. About half of our portfolio is US equities, which makes sense since about half the global equities market is American.

It’s just kind of funny to think that something perceived as risky to American investors is just a fact of life for the other half of the world.

Hi Julie!! Thanks for asking that question, and thank you so much for leaving a comment! I like hearing a response from listeners after I’ve answered their questions … it brings a nice ‘completeness’ to everything. 🙂

Ahhh, you’re in Canada!! That definitely shakes up the international-investing-game. Andrew Hallam, from Episodes 59 and 60, has a chapter in his book about investments that are suitable for people living in Canada and Australia. (You could also reach out to him via email or social media anytime; he’s super nice and extremely helpful.)